Oil prices surge as Iran, Trump decision take center stage

A Kiewit employee checks out the corner of the helipad on Shell's new Gulf deepwater platform, Appomattox, before it's set out to sea on Monday, April 23, 2018, in Ingleside, Texas. The helipcopter is the most common way to switch crews once the platform is in place in the Gulf of Mexico. ( Elizabeth Conley / Houston Chronicle ) less

A Kiewit employee checks out the corner of the helipad on Shell's new Gulf deepwater platform, Appomattox, before it's set out to sea on Monday, April 23, 2018, in Ingleside, Texas. The helipcopter is the most ... more

Photo: Elizabeth Conley, Chronicle / Houston Chronicle

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A view of Shell's new Gulf deepwater platform, Appomattox, before it's set out to sea on Monday, April 23, 2018, in Ingleside. ( Elizabeth Conley / Houston Chronicle )

A view of Shell's new Gulf deepwater platform, Appomattox, before it's set out to sea on Monday, April 23, 2018, in Ingleside. ( Elizabeth Conley / Houston Chronicle )

Photo: Elizabeth Conley, Chronicle / Houston Chronicle

Oil prices surge as Iran, Trump decision take center stage

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U.S. oil prices settled above $70 a barrel on Monday for the first time since 2014, passing yet another milestone in a recovery that could fatten profits for Houston’s oil companies, lift the local economy and raise prices at the pump.

It’s the latest piece of good news for the local energy industry, which is still recuperating from the worst downturn in a generation, one that cost thousands of jobs and put scores of companies in bankruptcy court. With oil prices climbing higher, oil producers and scores of companies that provide them equipment, rigs and crews could rebound faster than expected by the U.S. Energy Department and other forecasters, who earlier predicted that the average price this year would stay below $60 a barrel.

But whether the oil rally lasts depends heavily on what President Donald Trump decides to do about Iran on Tuesday. Traders bid up U.S. crude to more than $70 a barrel on the day before the Trump administration announces whether it will scuttle the Iranian nuclear pact and reimpose sanctions that could take hundreds of thousands of barrels of oil off global markets at time when demand is growing and supplies are tightening.

U.S. oil prices jumped more than $1 a barrel Monday to settle at $70.73 in in New York.

Oil companies have treated the rally with some measure of skepticism, recognizing that some of the gains are driven by speculation connected to increased tensions in the Middle East, rather than supply and demand fundamentals. So far, energy companies are still spending and hiring cautiously, leaving many geologists, geophysicists and engineers who once worked in Houston’s skyscrapers still looking for jobs more than two years after oil prices hit bottom in early 2016.

“The majority of the increase has been due to the fundamentals of the oil market,” said Andy Lipow, president of the consultancy Lipow Oil Associates in Houston. “But over the last couple of weeks, the geopolitical risks with Iran have taken center stage.”

Analysts estimate that the uncertainty over Iran and oil production declines in Venezuela have added $5 to $7 a barrel in recent weeks. To get a sense of the influence of the Iranian situation on oil prices, consider this: After Trump announced that an Iran decision would come Tuesday, oil gave back most of its gains to fall below $70 a barrel in after-market electronic trading.

The Iran deal, which lifted international sanctions in exchange for Iran abandoning a nuclear weapons program, was negotiated under former President Barack Obama. The agreement requires the president to periodically review Iran’s compliance and decide whether to keep the deal in place.

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Trump has called the Iran agreement the “worst deal ever” and in April said it was “insane” and “ridiculous.” In January, he gave Congress and European allies an ultimatum: Fix the deal or it’s over.

Analysts said European political leaders — France’s Emmanuel Macron, Germany’s Angela Merkel and the United Kingdom’s Theresa May — have over the past few months made progress on coming to a consensus on addressing concerns about Iran’s hostility in the region.

“By Trump’s own measure, they’ve gotten a lot done in the last five months,” said Matt Reed, a vice president at Foreign Reports in Washington, D.C.

If Trump doesn’t renew the deal by the May 12 deadline, European oil buyers would probably slow purchases of Iran’s crude and hamper the Islamic republic’s efforts to attract foreign investors, likely leaving its oil production flat over at least the next seven years, analysts with the British bank Barclays said in a note on Monday.

Analysts note that other factors have supported the rise in oil prices from the recent low of $43 a barrel in June. OPEC has largely stuck to its agreement of cutting production by 1.8 million barrels through the rest of this year.

In Venezuela, battered by an economic and political crisis, crude production has dropped to 1.43 million barrels a day last month, down from around 2 million barrels a day in July, analysts at French bank Societe Generale estimate. U.S. officials are also considering imposing oil sanctions on Venezuela after its elections this month, but oil production is already slipping by 60,000 barrels a day per month.

“This is quite bullish,” the analysts said.

Texas oil companies are grappling with their own production constraints — and that could keep prices higher, too. In the Permian Basin in West Texas, companies are running low on pipeline capacity as oil output surges, and the next major pipelines in the region aren’t expected to be finished until next year. That could lead companies to slow production, which could support higher prices, analysts said.

For drivers, all this could mean higher gasoline prices. The price of gasoline in Houston is averaging $2.55 cents a gallon, up nearly 35 cents from a year ago.